Archive for October, 2008

The Bureau of Economic Analysis released the their preliminary GDP figures for Q3 this morning. Those measures include a measure of savings as well. Over the last two quarters there has been a small uptick in the rate of household savings. The numbers are still very low — around 2% — but even that is an increase over the zero and negative savings rates we have seen in recent history. I would like to offer two short comments

It is good — not bad — that Americans have decreased their expenditures on current consumption. Although decreases in current consumption will have a negative impact on the short run prospects of the economy it is a positive development for long run sustainable economic growth. Much like our financial institutions need to unwind their debt (leverage) positions in order to set themselves up for future growth and financial stability, U.S. households need to dig themselves out of debt and create a pool of personal savings in order to put themselves on a firm financial footing.

Given our short election cycles, there will be political pressure to pass legislation that encourages spending at the expense of savings and in so doing make the recession as short as possible. If we take actions today that discourage households from firming up their own balance sheets (i.e. allow tax penalty free borrowing from retirement accounts) we are sewing the seeds for another financial meltdown in the future. A lack of household savings helped get us into this mess. We should bite the bullet and resist the temptation of short-term, and short-sighted solutions.

I’m a conservative. I’ve spent my money and my time in support of Republican candidates. I also support Barack Obama for president.

Modern conservatism is deeply rooted in ideas and political philosophy, in rational discourse and pragmatism. John Stuart Mill matters to conservatives. Friedrich Hayek and Milton Friedman matter as well. They matter not only because of their conclusions about the limited role of government power in a free society but because they were aggressive questioners, carefully dissecting problems to uncover potential solutions.

The American version of modern conservatism began as an intellectual revolt against the excesses of government emerging out of the New Deal era. The prevailing liberal view of the time was that government could engineer a more just and equitable society by elevating its role in the day-to-day activities of citizens. Proponents believed the benefits of collective decision making outweighed the increased restrictions on individuals’ liberties that such social engineering required.

The modern conservative movement, through rational discourse and appeals to empirical research in economics, pointed out that reducing these individual freedoms had negative consequences far in excess of the commonly held view. Yes, you could decrease poverty among low-wage workers by mandating a minimum wage, but you would also increase unemployment among the young and those of color. Yes, you could use the power of taxation to redistribute income, but this could dramatically shrink the wealth available to the entire society.

Conservatives used to ask the tough questions and did not accept simplistic solutions. That is why it is deeply disappointing to me, both personally and professionally, that John McCain has run a campaign that is so antithetical to rational discourse about public policy. His campaign has been about glib answers to complex problems. His choice for vice president was political malpractice.

He has catered to a wing of the Republican Party that believes everything will be all right–if only the government gets out of the way. No matter the problem, that is the only acceptable solution. To suggest that research about or thoughtful analysis of a situation might, in some cases, point in a different direction is apostasy.

For these Republicans, simply the act of doing policy analysis must mean that you are a liberal. They know that real Republicans, and real men, don’t need to think things through. I do not respect these people. They have dragged a proud movement that had much to offer our country down into the mud of ignorance.

And yet the reason I now support Obama is only partially due to McCain’s decision to embrace this base form of populism. It also stems from a growing respect for Obama’s thoughtfulness, which reveals itself when he’s faced with difficult questions. I do not agree with all elements of Obama’s tax policy, but I certainly get the impression he has thought about it a whole lot more than McCain.

In a world that will certainly throw many unexpected, unknowable problems at the next president, I don’t really care if I agree with all of their policy decisions. I want a smart, thoughtful person who can adapt his ideas to the facts on the ground. I don’t want someone who retreats to ideology because he cannot–or is not inclined to–think through the complexities of the problem at hand. Barack Obama is not afraid to talk about complicated solutions to complicated problems. He is a skilled critical thinker. John McCain, unfortunately, has not left the same impression on me.

I also believe that Obama will not end up being the orthodox liberal many have warned against or hoped for. He is not from Cambridge, Mass. He is from Illinois. His economic advisers, both formal and some informal, are from the University of Chicago, a school known for its free market philosophy; he also taught there.

The institutions with which you associate, after all, do affect your thinking. That life experience, combined with his inquisitive mind, will lead him out of the liberal underbrush when the House of Representatives inevitably proposes some hard-left legislation. I genuinely believe the people who are likely to be most disappointed with Obama are the far left wing of the Democratic Party.

I will not celebrate when Obama is elected president next Tuesday, but I will smile a little–and hope that my beliefs about him are correct.

At the end of Plato’s Republic, Socrates tells a story about a hero, Er, who dies in battle and is now facing the afterlife. Because of his moral character, Er is able to navigate the treacheries of the netherworld better than most. A wise walk through hell and a subsequent reincarnation assures Er that his attention to moral character in one life will reward him in the next. The Myth of Er introduces us to the idea that morality pays off in the long run, and immorality will eventually be punished.

But myths have consequences, and not all of them are good. Consider the uproar over Joe the Plumber. It makes little difference if Joe has a plumber’s license or not, or what Joe thinks of Mr. McCain or Mr. Obama. He has become an archetype for the “hard working American” who struggles against powers greater than himself to find his place in the world. All four of the current presidential/vice-presidential candidates buy into this imagery —- a class of people that work hard all day and get less than what they deserve. But John Henry is facing the new incarnation of the steam engine this time, global capitalism. And as the engine of global capitalism comes chugging down the tracks we look to a hero to stop its destruction [Insert your favorite Presidential candidate here].

Like most myths, there is some truth to it. There is a real struggle now in America, real confusion of the kind I’ve never seen in my lifetime. But, there is a potent lie in this myth as well. The lie is that one class of Americans (that is “hard working Americans”) work hard and another class that doesn’t. This non-hard-working class makes their living exploiting those who work hard. They wring their bread from the sweat of other men’s faces.

No they don’t.

Americans are collectively one of the hardest working nations in the world. Almost all of us work hard, whether we are bankers, lawyers, engineers, electricians, teachers….or, oh yes, plumbers. In fact, on average wealthier Americans work longer hours than their non-wealthy conterparts. People who wear ties to work aren’t living off of those who wear jeans. People who wear jeans to work aren’t living off of those who wear ties. You can create great political language from this myth. You can conjure the ghosts of the industrial revolution, a time when such a myth would have had more validity, but we live in a more complicated world now. It is a world in which there is far less of a difference between the day-to-day difficulties faced by a manager and a plumber. It’s tough for both of them.

Sloppy language is the the precursor of sloppy thinking and ultimately of bad policy. The Myth of Joe the Plumber is wrong in ways that are destructive to careful thinking about constructive public policy. If we are to believe the polls, Mr. Obama will soon be the next president of the United States. While he is certainly not the only one invoking this kind of mythology on the campaign trail, let’s hope he leads the effort to remove it from the American psyche.

The winds of political populism are never far from the surface of American politics. They can come from the right (Huckabee) or the left (Edwards). I believe they will increase in the coming years. My immediate concern is that, in a country that does little to create incentives to save, populist politicians could easily make the problem worse.

To the extent that Americans do save they often do so through employer-sponsored retirement plans, 401(k)’s and other tax shelters similar to these vehicles. These plans are a huge political target, and would be easy to exploit in order to foment class warfare and generate some extra revenue for the Treasury. To the aspiring populist politician I offer the following language that you can use at your next campaign stop in Toledo.

My fellow Americans, our country is facing many problems. We desperately need to make strategic investments in energy, in education, in health care [short dramatic pause] to make sure the American worker remains the most competitive and productive in world. We owe it to our children to make sure we stand up to the tough decisions now so that they aren’t faced with insurmountable problems later.

My friends, some Americans have benefited more from the gifts of this country than others. Some are able to retire comfortably at an early age because they worked for large corporations and had access to generous retirement plans. We gave them a break when they put money in these plans, they did not pay taxes on it, and they are now living better off than many of us. Fairness dictates that those who benefited from this loophole in the tax system pay their fair share.

Today I am proposing that anyone who has accumulated more than one million dollars in a 401(k) plan be subject to a one time 10% windfall retirement tax on that money. They have benefited from the system. Now it is time for them to support the country that allowed them to accumulate this wealth. To the 95% of Americans who don’t have this much money in these tax loophole accounts I will never propose additional taxes on your money. You will need that to secure your own retirement.

Not only do I think the kind of language I’ve written above is plausible in coming years, I think it is likely.

How do we avert this? Perhaps we cannot. But getting more people involved in tax-deferred savings plans would help. The more people you have involved, the more obvious it is to a broader cross-section of the electorate that any type of windfall tax on this money would be unfair. Expanding access to small businesses would move us in the right direction, as would the ability to divert tax refunds directly into tax-deferred savings accounts. Mr. Obama’s recent proposal (yesterday) to allow tax-penalty-free withdraws from these accounts would not help. Not only would it encourage people to draw down their retirement savings, it would make that money seem less like retirement savings and more like ordinary income. To the extent that the public views it as ordinary income it makes it far psychologically easier to believe taxing these “rich” people is fair. Even the threat of this kind of populist-inspired taxation is a serious disincentive to savings.

The checkout line at the grocery store is generally an uneventful place. I’m usually moving as quickly as I can to get home and rarely hold conversations with anyone. My thoughts are focused squarely on domestic issues at that point, my work concerns have largely vanished. This Thursday was different. The person bagging the groceries in my line, perhaps to the chagrin of the store manager, was speaking in loud tones to anyone willing to listen. His voice could be heard not only in the line I was in but at least three lines in either direction. He was mad, and I mean mad in a way that kind of freaks you out if you are standing in the line in which he is working. He was mad because he had lost a substantial amount of his retirement money in the market free fall, and he was letting anyone within earshot know that he believed the criminals responsible for this loss should face the long arm of the law.

This feeling was echoed in several blog comments I received based on my “Bailout Envy” post and blog reference in an article that ran a few days ago on Yahoo! Finance . For the first time since I started this blog, I decided to reject some comments — their language unfit to print. A reasonable characterization of their position is that I should be ashamed of myself for coming to the defense of Wall Street executives and that the U.S. prison system should be enlarged to handle the inflow of financial services employees who should soon be residing there.

In both the case of the grocery store employee, and the comments (some posted others not) to my blog, the open wounds of class warfare are evident. The anger is palpable.

Some banking executives deserve to go to jail. I have little doubt that this will occur. At the same time it is so incredibly convenient, so grossly unfair, to blame the entirety of what has happened on banking executives and mortgage brokers. Many of these people, just like you and I, saw and understood what was happening in only a very partial way at best. Perhaps they should have understood, but that is a tall order in such a complicated market. Let the first person who has never failed to mention a defect in the used car they were selling cast the first stone.

The cold, tough reality here is that these banks would have never been able to profit from these loans if Americans had not, en mass, made a headlong rush into purchases they could not afford, debt they could not handle. It is easy to blame bank executives. It is somewhat harder to blame the people we know in our lives who took out mortgages based on highly speculative bets on home price appreciation, to blame those who used their houses as piggy banks — taking out home equity loans to finance their current consumption. And it is the most difficult of all focus our anger back towards ourselves, our individual failings. We are all to blame, collectively and individually. Our banks, our neighbors, and many of us lived a life of cheap credit and easy money — a life we could not afford. The demon lies not in the guilded towers of Wall Street, but in our ourselves.

One almost-compulsive habit I have is asking “how is business going?” whenever I have occasion to talk to the owner of a small business. These opportunities are frequent. Almost all of us run into small business owners several times a week as we shop, eat lunch and go about our daily lives. I could spin an academic story about why I frequently ask this question, but the real answer is that I grew up in a family that owned some small businesses and just find small business owners interesting people to talk to. An added benefit, though, is that you often get a faster and better sense of what is going on in the economy than the often-significantly-lagged government statistics suggest. Alan Greenspan was well known for talking incessantly with business people, trying to figure out the next risk on the economic horizon. But he was talking to the CEO’s of the Goldman Sachs and General Electrics of the world. I am more likely to talk to the owner of a local Chinese restaurant. In fact, during the last ten days I have asked my compulsive question to the owners of

a Chinese restaurant

a dealership that sells mostly Vespa scooters

a not-too-small (20 people) software developer

a company that makes and markets some art and design products made of cardboard

All reported a recent decrease in sales. So, I am not waiting for the government statistics to tell me the economy is contracting. While four small businesses each reporting that their sales are decreasing could be a fluke, I doubt it. The economy is already contracting.

One of the common explanations for the current housing crisis, and the subsequent sub-prime mortgage mess is that the U.S. was inundated with cheap money from overseas, a world “savings glut” that depressed interest rates and facilitated reckless lending. There is a great deal of merit to this argument. There can be little doubt that U.S. interest rates were made low by the inflow of foreign capital, and that this contributed to consumers headlong rush into debt. It also helped create the business environment in which some of the more exotic, and risky, lending instruments looked safer than they were.

But this explanation is often put forward as the whole story when in reality it is a glass half full.

Americans also contributed to the current economic demise by having insufficient savings. Yes, there was a lot of capital (savings) sloshing around the economy, but precious little of it was coming from the bank accounts of U.S. households. If Americans would have had more savings, some of that savings would have been used to put down payments on houses. Instead of the millions of homes sold with essentially no money down many of these homes would be owned by people with equity stakes right from the beginning. Why does this matter? It matters because if you have a 20% equity stake in your house and prices fall you are a whole lot less likely to walk away from your house, allowing it to be foreclosed upon, than someone who has no stake and finds themselves with negative equity when prices fall. Giving up on nothing is easier than giving up on something. The housing market collapse has fed its downward spiral with this nothing, the savings that never happened, the down payments that never existed.

When I wrote “Whatever Happened to Thrift” I discussed the posibilities of downward economic spirals fed by this lack of savings. It occured sooner than I had imagined. I suspect savings rates will tick up in the coming months. History teaches that countries that go through tough times save more money. We are about to learn thrift the hard way.